Shoppers Stop: Book Profits

Retail companies flitted in and out of the spotlight as debates raged over permitting foreign entry in multiple-brand retail. Stocks of select listed retailers, meanwhile, saw a sharp run in prices in the year to date. The stock of Shoppers Stop is among the best performers, up 68 per cent since January this year. The company is among the better retail players, sporting a comparably lighter debt, even with its aggressive expansion, diversified product lines and strong brands.

However, positives appear to be largely priced in. At Rs 418, the stock is at 86 times trailing four-quarter standalone earnings, among the most expensive in the retail space. On a consolidated basis, the company has been incurring losses. This, together with a high cost structure due to rapid store expansion, deteriorating growth in older stores and lower volumes, don’t indicate an up-tick in the near term earnings picture. Consumer sentiment too remains muted.

Possible benefits from foreign investment in multi-brand retail also seem to be priced in. While the management has indicated that it could look to foreign investments to tie up sourcing and logistics, investments on this front are unlikely in the near term.

Investors can thus take advantage of the stock’s blistering run and book profits on their holdings in the stock. Investors who bought the stock on our two previous calls last year stand to make average gains of 36 per cent.

Multiple product lines

The company has a diverse product offering, encompassing fashion, cosmetics, and everyday grocery and household items. The flagship format is Shoppers Stop, which retails apparel and accessories. It houses domestic and international brands such as Tommy Hilfiger and Mango, besides having its own private labels such as STOP. Most brands have strong recall.

Apart from this, the company has chains in cosmetics (Estee Lauder, MAC and Clinique), motherhood and baby care (Mother Care) and home products (Home Stop). The other large chain is Crossword, which retails books and music. HyperCITY is the company’s nascent hypermarket format.

Slowing growth

Shoppers Stop operates entirely in the premium end of the price spectrum, moving towards the luxury category. A premium bent does offer a shield from a contraction in spending, but the relentlessly high prices have reflected on Shoppers Stop too.

Sales growth in stores open for a year or more (same-store growth) is an indicator of how well existing stores are performing, and how dependent a chain is on new stores to drive growth.

The figure for the flagship Shoppers Stop chain drifted down to 3 per cent for the April-September 2012 period, against the 9 per cent in the same period last year. Further, much of the growth is price-driven, with same-store volumes declining 4 per cent for the six months to September 2012. Sustained growth requires good volumes too.

In HyperCITY too, same-store volume growth dived 8 per cent against 9 per cent growth in the April-September 2011 period. The format’s sales growth has also slowed to 4 per cent. The company’s consolidated sales have grown 15 per cent for the six months ending September 2012 over the year-ago period.

The management has indicated a healthy festival season. However, sustained growth is required to justify valuations built into the stock. That even fast-moving consumer goods companies are now seeing moderation in premium discretionary products doesn’t bode well for consumer sentiment.

Margin trouble

Consolidated revenues have grown at an annual 29 per cent over the past three years. Net profits, however, dropped by half in the previous fiscal as losses in the hypermarket format mounted. The company has been on an expansion spree — Shoppers Stop format added 11 stores in the past year, six across smaller formats and two to HyperCITY. Only Crosswords has shrunk by two stores between September this year and last. This expansion has left it with high initial costs. HyperCITY is increasing the proportion of fashion in its total offering and sales, which could offer some buffer to margins.

However, cost structure remains high — at the consolidated level, power, rentals, adspend and other administrative expenses climbed to 30 per cent of sales for the six months to September 2012, against the 28 per cent than the same period last year. Operating margins shrunk to just 2 per cent from 4 per cent.

Slipping operating profits squeezed cover available for interest expenses. Interest cover now stands at just 1.23 times against the 2.9 times last year. While the company has lower debt compared to peers, leverage is still on the higher side at 0.8 times (consolidated, as of March 2012). With higher depreciation costs due to new stores thrown into the mix, the company has slipped into losses at the net level against the profits of the comparable year-ago period.

The strong performance of the flagship format and smaller formats had compensated for losses in HyperCITY. But with these formats also turning sluggish — standalone net profits shrunk 76 per cent in the half year ending September 2012.